The stock market goes both up and down. One of the biggest facts about the great depression is that most investors did not know what to do if the market went down. Which is why it is important to have some sort of game plan today and to learn from the past.
So, what can you do if stocks start to fall? Essentially you can only do one of two things, you can either lessen the blow, or you can attempt to profit from it.
First let’s look at how you could lessen the blow. When stocks crash there are a couple different types of securities that fair the best. The first is a bond. Bonds are suppose to be a very safe investment when compared with stocks because they are either backed by a company or the U.S. government.
While they don’t tend to have as much potential as stocks they are also a lot less volatile. This means if stocks are falling bonds will likely do better.
Another thing to look into is great dividend paying stocks. Dividend stocks pay their investors for holding them, so they have some extra demand. In fact when the market crashes a lot of investors will seek safety in dividend stocks. The extra buying pressure for these stocks is that it has historically helped them do better when down market occur.
Now preparing for a bears market does not have to mean that you must look for ways to lessen the blow. There are ways to make money if stocks fall. The strategy is called short selling stocks.
Shorting is the process of borrowing stock from your broker and selling it on the open market. Once the stock’s price has fallen you can buy it back and give it to your broker. Basically instead of buying low and selling high this attempts to sell high first and then buy back low later on.
Shorting can be a very powerful way to make money, but if you don’t have a game plan and a way to lessen your risk if you are wrong it also has unlimited risk. So, if you are going to short stocks make sure you have a plan that you believe in first.
